India’s most significant direct tax reform in over six decades moved a step closer to becoming law on Monday, as the Select Committee of the Lok Sabha submitted its report on the draft Income Tax Bill, 2025. The panel broadly endorsed the government’s goal of simplifying the tax code, but recommended a series of changes to address potential ambiguities, safeguard taxpayer rights, and ensure regulatory continuity.
The report, tabled by committee chairperson Baijayant Panda, a member of parliament from the Bharatiya Janata Party (BJP), comes a few months after the bill was introduced in Parliament in February by finance minister Nirmala Sitharaman. The proposed law is intended to replace the Income Tax Act of 1961, which has served as the cornerstone of India’s direct tax regime for more than six decades.
While expressing support for the bill’s intent to streamline tax administration, the 32-member panel flagged multiple concerns and technical inconsistencies that it said could dilute protections or increase the compliance burden if left unaddressed.
Key concerns
Among its core recommendations, the Committee called for clarifying several key definitions—such as those of capital asset, infrastructure capital company, and parent company—to align them with current laws and remove outdated references.
It urged harmonization of the definitions for micro and small enterprises with the MSMED Act, and pressed for more precise rules on various deductions, including those related to house property income, scientific research, and pension contributions.
The panel identified a drafting anomaly in the rebate clause applicable to individuals earning above ₹12 lakh and recommended corrective language to avoid misinterpretation.
To protect taxpayer rights and preserve discretion under the anti-avoidance regime, the Committee proposed reinstating the phrase “in the circumstances of the case” under the General Anti-Avoidance Rules (GAAR). It noted that the phrase had served as an important safeguard to ensure that tax enforcement under GAAR was context-sensitive and not excessive.
The report also opposed the blanket disallowance of deductions for late filers and supported retaining flexibilities like “deemed application” for non-profits. It urged clearer rules for taxing religious and charitable trusts and anonymous donations to reduce ambiguity.
In addition, the panel recommended that valid circulars, approvals, and exemptions under the existing Income Tax Act, 1961 be explicitly carried forward into the new regime. It also called for easing compliance requirements for non-residents and codifying standards related to valuer qualifications and jurisdictional limits.
Relief for small taxpayers and non-residents
The Committee flagged the risk of prosecution in cases where small taxpayers fall below the taxable threshold but are still required to file returns to claim refunds.
“The Committee observed that the current mandatory requirement to file a return solely for the purpose of claiming a refund could inadvertently lead to prosecution, particularly for small taxpayers whose income falls below the taxable threshold but from whom tax has been deducted at source,” the report said.
“The Committee, therefore, recommended…to provide flexibility for allowing refund claims in cases where the return is not filed in due time,” it added.
For non-resident liaison offices, the Committee proposed extending the timeline for filing compliance statements from 60 days to eight months, citing the practical challenges faced by overseas entities in adhering to tight deadlines.
Ensuring regulatory continuity
The Committee emphasized the need for a clean but careful transition from the old law to the new regime. It recommended revising Clause 536—which repeals the Income Tax Act, 1961—to explicitly carry forward all valid rules, circulars, and approvals to prevent operational disruption.
Other technical suggestions included reinstating the term “Nil” in clauses related to lower tax deduction certificates, prescribing clear qualifications for registered valuers, and correcting ambiguous language around deductions and refund eligibility.
FinMin to review recommendations
With the submission of the Select Committee’s report, the finance ministry will now examine the recommendations before finalizing the legislation for passage. Given the breadth of changes suggested, some revisions are expected before the bill becomes law.
“The statement of objects and reasons of the Bill clearly states that as a result of amendments, the basic structure of the Income-tax Act, 1961 has been overburdened and language has become complex, increasing the cost of compliance for taxpayers and hampering the efficiency of direct-tax administration,” Panda, the chairperson of the committee said in the report.
Panda said the Income-Tax Bill, 2025, has been prepared to make the law concise, lucid and easy to read and understand.
“The mandated function of a Select Committee on a Bill is to go through the text of the Bill, clause-by-clause, in order to see that the provisions of the Bill bring out clearly the intention behind the measure, that there will be no procedural defect in its working, that the Bill does not offend provisions of the existing law and that the object proposed to be achieved is adequately brought out,” Panda added.
